Russia-Ukraine gas crisis intensifies as all European supplies are cut off

David Gow
The Guardian
Wednesday 7 January 2009

Gazprom, the state-owned Russian gas group, today cut off all supplies to Europe travelling through Ukrainian pipelines, intensifying the political and economic crisis that has arisen out of a payments dispute between the two countries.

Amid evidence that people in eastern Europe are being deprived of heating as the Arctic cold snap continues, Russia and Ukraine continued to blame each other for the deadlock.

Gazprom accused Ukraine of shutting down the fourth and last open pipeline crossing the country while officials at Naftogaz, Ukraine's state energy firm, simply said: "Words fail us."

The complete shutdown comes ahead of top-level talks in Moscow tomorrow between Gazprom and Naftogaz executives to resolve a pricing dispute that has arisen in each of the last four years. Ukraine, semi-bankrupt and being bailed out by the IMF and EU, is being offered natural gas at higher prices, but substantially below those charged on European markets.

The dispute, viewed by the EU as a purely commercial one until recently, threatens a fresh breakdown in relations between Brussels and Moscow, with European Commission officials warning that Russia's reputation as a reliable partner is once again at stake.

But analysts point out that, since the last serious crisis broke out in 2006, Europe has done very little to avert shortages. Instead of creating an integrated market, drawing on alternative energy supplies, countries have simply drawn up individual contracts with Gazprom, increasing dependence on Russia.

Russia supplies a quarter of Europe's gas and 80% of this transits through Ukraine. As shortages hit western Europe and intensify in the south and east, EU governments will meet on Friday to consider sharing supplies held in storage.

Russia completely turns off gas spigot

MOSCOW/KIEV — Russian gas flows to Europe through Ukraine shut down completely on Wednesday, reducing power to industries and homes in south-east Europe and disrupting supplies to major economies.

The dispute, over gas prices and debts owed by Ukraine to Russia, left thousands of households in Bulgaria without heating and hit supplies as far west as France and Germany as Europe faced freezing mid-winter temperatures.

“Russia, which supplies 80 per cent of its gas to Europe through Ukraine, has left Europe without gas. There is zero transit,” said Valentin Zemlyansky, a spokesman for Ukrainian state energy firm Naftogaz.

Russian gas export monopoly Gazprom blamed Ukraine for the closure. It said Russia was still pumping a small volume of gas to Ukraine and accused Kiev of keeping it.

At a meeting with Gazprom chief executive Alexei Miller, Russian Prime Minister Vladimir Putin said all gas supplies through Ukraine should be stopped.

“I agree with the proposal to stop deliveries, but it should be done publicly, in the presence of international observers,” he said in televised remarks.

Gazprom said it was raising supplies to the European Union and Turkey via other routes. Despite those measures, the dispute cut Russia's supplies to Europe – which depends on Moscow for a quarter of its gas supplies – by half.

The reduction in supplies started on Jan. 1 when Russia reduced gas volumes to Ukraine, and has been sharper and more prolonged than a similar disruption in January 2006.

The International Energy Agency said Bulgaria, Romania, Greece and Turkey would struggle to provide electricity and heating if cold weather and gas disruptions continued next week.

Several countries have taken emergency measures to eke out dwindling fuel reserves by switching to other energy sources.

The European Union presidency, which has so far chosen not to intervene in a dispute between two energy companies, said on Wednesday it would take a more forceful approach unless the gas was flowing again by Thursday.

Czech Prime Minister Mirek Topolanek, whose country holds the EU presidency, also said the union was preparing an emergency meeting of EU energy ministers.

The EU has a limited ability to act and it has failed to reduce its use of Russian energy because of internal divisions and the lack of alternatives. Some member states have bilateral energy deals with Russia, undermining hopes of a united front.

Ukraine's Naftogaz chief Oleh Dubyna said he would go to Moscow on Thursday for talks with Gazprom's Miller, but both sides traded blame and there was no sign Moscow and Kiev were closer to resolving the row over pricing and transit fees.

Mr. Dubyna said Ukraine will insist on a price of $201 per 1,000 cubic metres of Russian gas for 2009, less than half Russia's proposal. It also wants to increase transit fees and scrap a controversial gas intermediary.

Ukraine's pro-Western President Viktor Yushchenko appealed to the European Union to use all efforts to help end the crisis, which has further dented investor confidence in his country.

The cost of protecting Ukrainian debt against restructuring or default rose to 54.75 per cent on an upfront basis, meaning an investor buying protection for $10 million of Ukrainian debt must pay $5.475 million plus $500,000 a year for five years.

Ukraine said it was planning to reduce supplies of gas to some metals companies and chemical enterprises, but households have not yet been affected.

Eastern and central Europe have borne the brunt of the row, with Bulgaria cutting back or suspending supplies to industrial users and at least 45,000 Bulgarian households going without central heating on Wednesday. Schools were shut and some companies were closed.

The Hungarian unit of Japanese car maker Suzuki, one of Hungary's biggest exporters, halted production after Hungary imposed restrictions on industrial users of gas, a Suzuki spokeswoman said.

In Bosnia, the sole alumina factory said it had been forced to stop production and ArcelorMittal said it was suspending production at its Zenica plant.

The euro zone's major economies have escaped significant economic repercussions, but France has reported a drop in supplies and an Italian industry ministry spokesman said Italy has begun tapping its stockpiles of natural gas.

German energy provider E.ON Ruhrgas reported a drastic decline in incoming Russian gas deliveries, but said no industry or households would be short of gas. It has warned that prolonged cuts combined with a cold spell could cause shortages.

Big energy users like aluminum, glass and metals makers could be hurt by a lengthy crisis.

Energy prices on international markets have risen in response to the Ukraine-Russia dispute. On the British gas market, the biggest and most liquid market in Europe, contracts on Tuesday rose to the highest level since October, although they softened on Wednesday.